SIE Chapter 11

Customer Account Statements

Account statements, which are snapshots of the customer's account, must be sent at least quarterly by the firm.

Marginable Securities

- ETFs - Close ended funds - exchange listed stocks - fixed income securities - LEAPS options with more than nine months till expiration

Securities that cannot be bought on margin

- Options with less than 9 months to expiration - Mutual funds - annuities

Transfer on Death (TOD) Account

A TOD account has a named beneficiary and avoid probate. This means the assets in the account bypass the estate settlement process and are transferred directly to the beneficiary at death

Depository Trust & Clearing Corporation (DTCC)

A clearing corporation with the primary role of facilitating the exchange, payment, and settlement process for securities transactions. The largest clearing corporation is the National Securities Clearing Corporation (NSCC). It is a subsidiary of the DTCC, which is jointly owned by all broker-dealers.

Clearing Versus Introducing Firm In a margin account, securities are handled by which one?

A clearing firm is responsible for processing and settling customer transactions, as well as maintaining custody of customer cash and securities. This contrasts with an introducing firm which has the direct relationship with the client and can accept customer orders but does not handle customer assets or the mechanics of the actual trade. In a margin account, the securities positions are maintained by the clearing firm rather than the introducing firm

How does a corporation indicate who is authorized to trade for a corporate brokerage account?

A corporation passes a resolution of the board of directors to set up a brokerage account. The resolution specifies who will have trading authority for the account.

Discretionary Account

A discretionary account is a brokerage account where the customer has given their rep at the firm the written authority to make investment decisions and trade on their behalf. Gives broker Power of Attorney

Do not call list exceptions

A registered rep can call an individual on the do-not-call list if 1. the individual is an existing customer of the firm 2. the registered rep has a personal relationship with the individual 3. or if the individual has provided prior written consent

Trust Invalidation

A trust may be invalidated (aka overturned) due to undue influence (e.g. the individual signing the trust documents was coerced) or lack of capacity (e.g. the individual signing the trust documents was mentally incompetent).

Power of Attorney cancelled when?

Cancelled if customer is declared legally incompetent Exception: If customer had a durable power of attorney

Commingling

Customer and firm assets must be segregated from one another. Mixing the two is a violation referred to as commingling.

Discretionary Account Approval

Discretionary accounts must be approved by a principal prior to the first trade and each discretionary trade must be approved by a principal promptly after execution

Vulnerable Investors

FINRA defines vulnerable investors as those aged 65 and older as well as any person aged 18 or older who the firm or its reps reasonably believe has a mental or physical impairment that renders the individual unable to protect his or her own interests. If the firm believes that there has been or will be financial exploitation of a vulnerable investor by a party able to transact the account (e.g. the account's trusted contact) then the firm can institute a 15-business day hold on the account to review the facts and circumstances. If after the 15-business day hold the firm has reason to believe that the malfeasance is ongoing, they can extend the hold on the account an additional 10 business day

Hypothecation

For margin accounts (borrow 50% of price from broker dealer to buy securities), customer agrees to pledge securities as collateral for loan

SIPC General Creditor

If the SIPC limit of coverage is exceeded, the customer becomes a general credit of the broker-dealer

SPIC Securities Valuation Date

In the event of a broker-dealer insolvency, the market value used to determine the amount of an investor's claim is based on the date the bankruptcy filing is made with the court

Fee based Accounts

In a fee-based account, the customer pays a flat fee for as many trades as they would like. This type of account would not be appropriate for a buy and hold investor

Checks are made payable to who in Joint Accounts?

In a joint account checks must be made payable to all parties

Trust Account

In a trust account, a beneficiary's assets are managed by a trustee. The trustee has a fiduciary responsibility, meaning they must act on behalf of the beneficiary by ensuring that the terms set forth in the trust agreement are adhered to. One benefit of a trust is that it allows the creator of the trust, or grantor, to limit or restrict the use of the assets. For example, a grandparent can set up a trust for a minor that allows the assets to be used for educational expenses only. Another benefit is that certain types of trusts can be used by a customer to ensure their assets avoid probate and instead go straight to the named beneficiary.

Interest rates in a margin account?

Interest charges in a margin account are based on the broker call rate, which is assessed by individual banks.

Two types of joint accounts and differences?

JTIC (join tenants in common): divided account where each account owner specifies their ownership percentage. Upon death, portion is distributed to the beneficiary. *best for siblings/ unrelated friends* JTWROS (join tenants with rights of survivorship): all owners own 100% of the assets. If one of the owners dies, share of the account passes to surviving owners. *best for husband and wife*

Account Initial Minimum Equity Requirement

Long: <4000: Either 2000 or full amount >4000: 50% 25% margin Short: <4000: 2000 >4000: 50% 30% margin

UGMA New Account Registration Form: what info needed?

Name of the custodian. It would not include the name of an individual who donates funds to the account (unless the donor was also the custodian)

What form must be completed when a customer opens a new brokerage account with a broker-dealer?

New Account Form Firm must keep a record

Anonymous accounts

Numbers or symbols can be used. Broker dealer must still receive written statement of ownership and proof of identity

Loan consent form

Optional component of the margin agreement. If signed by the customer, it allows the broker-dealer to lend stock held in the customer's account to other investors to facilitate short sales

A separate risk disclosure statement is required when all of the following types of accounts are opened for non-institutional investors

Options accounts Custodial accounts Margin accounts

Telemarketing Rules

Prior to making a cold call, the caller must ensure the individual is not on the national or firm's do-not-call list. Cold calls are permitted between 8am and 9pm in the time zone of the person being called Unregistered employees are allowed to make cold calls, but must pass phone to registered person when asked for further information

Regulation S-P

Regulation S-P established privacy standards to ensure broker-dealers maintain the security and confidentiality of customer information. Reg S-P requires firm to provide clients with privacy notices at account opening and annually thereafter explaining what information the firm gathers about them, where this information is shared, and how the firm safeguards this data. Clients also have the option to opt out of having certain information shared with third parties unless at the request of a regulator (i.e. the IRS or FINRA) or otherwise legally required. Clients must be given 30 days to opt out.

Securities Investor Protection Corporation (SIPC)

SIPC is a not-for-profit corporation that protects each separate customer account in the event a broker-dealer goes bankrupt. funded and supported by broker dealers Specifically, each separate customer is protected for up to $500,000 total, but not more than $250,000 in cash. Importantly, SIPC coverage protects customers' cash and securities from a broker-dealer's failure, but not from market losses. Note, that SIPC does not protect non-securities, such as a commodities or futures

Mark to Market: how often?

The value of a customer's margin account is market to market daily to determine equity balances and margin calls

Minors Accounts

UGMA and UTMA accounts are securities accounts that can be established for a minor. Because the minor owns the account, it is their social security number on the account and the minor is liable for any taxes. However, the account is managed by a custodian, who trades on behalf of the minor. The custodian can be the same individual that donates the assets to the account (e.g. a parent can gift the assets and be the custodian managing the account). Once the minor reaches the age of majority, which varies by state, they take control of the assets. Additionally, any assets that are gifted to the minor's account are irrevocable, which means they cannot be taken back

Do not call list

Under the telemarketing rule, once an individual is added to the firm's internal do-not-call list, they remain there indefinitely

Holding Customer Mail

Up to 3 months allowed Must be requested in writing - Often done when customers are travelling

Inherited securities' cost basis

When an investor inherits securities, the investor's cost basis is adjusted to the fair market value of the security at the time of death. This is referred to as a "stepped-up basis.

Free-Riding

When an investor sells their securities without ever paying for them If this happens, account will be frozen for 90 days and transactions will be limited to sell orders and purchases where the customer fully pays upfront prior to trade

Not held orders

When the customer provides the asset, amount, and action, but allow the registered rep to choose the price and time of execution. For example, the customer states "Buy 100 shares of XYZ stock when the price is right". Not held orders do not require discretionary authority

Trading authority

he owner of an account has trading authority, which is the ability to trade the assets of the account. A non-account holder can only trade on behalf of the account if this right is granted in writing by the account holder